The Securities and Exchange Board of India (SEBI) has recommended the abolition of the Long-Term Capital Gains (LTCG) tax on equity investments made by foreign investors.
Additionally, it has proposed tax relief for domestic mutual fund investors who switch between their investment schemes.
The objective behind these recommendations is to attract foreign capital and encourage retail investors to remain invested in domestic mutual funds, even in the face of weak returns from the equity market.
Ahead of the Union Budget to be presented in February 2027, SEBI has submitted these proposals to the government as part of its pre-budget recommendations. These recommendations are not binding, and the final decision rests with the government.
SEBI Proposes Elimination of LTCG Tax for Foreign Investors
Presently, foreign investors pay 12.5% LTCG tax on eligible equity investments held for more than 12 months. There is a 20% tax on short-term capital gains (STCG) on equity investments held for 12 months or less. Also, investors pay securities transaction tax (STT) on trades and withholding tax on dividends.
SEBI has proposed to eliminate the LTCG tax to reduce the tax burden on foreign investors and change the image of India as an attractive investment destination.
The proposal comes in response to ongoing selling by foreign investors in Indian equities. In 2026, these investors sold a record $31 billion worth of Indian stocks, while domestic markets have lagged behind several emerging-market peers over the past two years.
The recommendations from SEBI followed multiple meetings with foreign investors over the last two years, during which taxation consistently emerged as a major concern.
The regulator also highlighted that the transaction costs associated with investing in Indian equities are among the highest in various jurisdictions.
Budget 2027: Mutual Fund Investors May Get Tax Relief on Scheme Switches
The Securities and Exchange Board of India (SEBI) has proposed to exempt domestic mutual fund investors from Long-Term Capital Gains (LTCG) tax when they switch from one scheme to another, as long as they have held the existing investment for more than a year.
At present, switching between mutual fund schemes is considered a redemption from the existing scheme and a new investment in another.
This leads to taxable capital gains, which are subject to tax, even when investors are simply reallocating their funds between schemes instead of withdrawing them from the market.
If SEBI’s proposal is accepted, investors will be able to switch their eligible holdings without incurring any immediate long-term capital gains (LTCG) tax liability.
This will provide investors with greater flexibility to rebalance their portfolios, without having to face the tax burden associated with redemptions.
Given the size of India’s mutual fund industry, this proposal is particularly relevant. Domestic mutual funds manage assets worth ₹82.6 trillion, while an average of ₹3,000 crore is received through monthly investment plans.
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What Arises Next
The proposals fall under SEBI’s pre-budget recommendations and have not received approval from the government till now. The final decision on whether or not to include these tax changes in the Union Budget 2027 will rest with the Ministry of Finance.
Till then, the current capital gains tax provision will remain applicable to foreign equity investors and domestic mutual fund investors.
